Warren Buffett has racked up big gains with financial and consumer staples stocks over the past couple years. But investors who try to jump on board in these sectors now are chasing after a train that has not only already left the station; it may have already reached its terminus.
In recent months, Buffett has been gradually lightening his exposure to consumer-sensitive stocks and bulking up on areas where he had been underweight – espe- cially energy. Late last year, Buffett’s Berkshire Hathaway (BRK.A) holding company took out a $3.7 billion stake in oil and gas giant Exxon Mobil (XOM).
Catapulted in part by the Buffett purchase, Exxon surged to a new record high of over $100 per share by the end of 2013. This is a stock we’ve long touted as the sort one can buy for an all-weather portfolio and hold onto regardless of market condi- tions due to its AAA credit rating and consistent history of dividend increases.
That’s still the case, but at this point investors shouldn’t expect spectacular share price appreciation out of Exxon. Bigger appreciation potential can be found in oil stocks that didn’t get the Buffett bounce and are now relatively undervalued.
The Exxon of China
High on the list of candidates are Asian Big Oil powerhouses lesser known to American investors – but more attractively valued and in many cases faster growing with bigger dividend yields. Investment analyst Reuben Brewer points to China Petroleum & Chemical (SNP) and CNOOC (CEO).
“Chinese energy companies like these have become major industry players with growth prospects that may be better than industry giants like ExxonMobil,”
I’d add PetroChina (PTR) to the list. With a 4.0% dividend yield and a $191 billion market capitaliza- tion, PetroChina is arguably the ExxonMobil of the China region. It could one day even overtake Exxon in total market value as China moves closer to overtaking the U.S. as the world’s largest economy.
The stocks PTR, SNP, and CEO each trade on the New York Stock Exchange as American Depository Receipts (ADRs) that represent shares in foreign companies. You can also own these stocks via iShares China Large-Cap (FXI), a $5.7 billion exchange-traded fund.
Inside Buffett’s Remarkable
Market-Beating Track Record
So what’s behind Buffett’s renewed interest in the energy sector? Undoubtedly, relative valuations play a role. It’s also likely that inflation concerns have entered Buffett’s investment decision-making process – and a stock like Exxon gives him exposure to tangible assets.
Even though Buffet’s political views lean left, he grasps the nature of our monetary system and the risks it presents. Buffett’s father, Howard Buffet, was a Congressman who advocated a return to sound money backed by gold.
Whatever Warren Buffett’s complete rationale is for investing where he does, you can’t argue with his results. Even in old age and no longer able to fish for spectacular values in small companies due to Berkshire’s sheer size, Buffett continues to outper- form the market. Berkshire share prices rose 32.7% in 2013, slightly besting the S&P 500 for the second year in a row. Over the past ten years, Berkshire has gained 111.2%, versus 66.2% for the S&P 500. But most remarkably, since 1977, Buffett has delivered average annual returns of 26.4%, versus 9.3% for the S&P 500.
Most money managers actually perform slightly worse than the benchmark indexes over long periods of time; only a select few beat the market after all fees and transaction costs. Buffett’s track record over 35 years? Almost unheard of.
I don’t suggest you follow Warren Buffett or anyone else blindly. But his recent interest in the energy sector does underscore the strong values you can find there. As always, you must do your own research before investing – or consult with a professional investment advisor for guidance. As Buffett himself espouses, don’t invest in what you don’t know.